Qatar University

College of Engineering
GENG 360–Engineering Economics
Fall 2021, Final Exam

Total Points = 35, Total Time = 2 hours (120 minutes)

Student Name Student ID

Date: Dec. 07, 2021

Instructions:

1. Check if you had a total of 10 pages (including this cover page, formula and table sheets)
2. Do not detach the formula/table sheet provided.
3. Follow university rules as applicable for exams and conduct. Using a smartphone is forbidden
at any reason
4. This exam paper includes the answer space as well. Please write your answers in the space
provided. If you use the backside of the paper, indicate this clearly on your exam sheets.
5. Answer the questions on the exam sheets provided. No separate answer-book/sheet will be
provided. All questions are compulsory.
6. You have a total of 120 minutes (2 hours) inclusive of reading time to complete the exam.
Please use your time effectively and read the questions carefully.
7. Each question starts with a new page.
8. Draw cash flow diagrams, when necessary.
9. Show all your work to receive full credit.
10. Equations and compound interest factor tables are provided
11. The maximum points that you can earn are 35 points.

Note:

Cheating is an academic violation according to Qatar University rules and regulations,

and in some cases, it may result in final dismissal from the University. Students should
not under any circumstances commit or participate in any cheating attempt or any act
that violates student code of conduct.

Page 1/10
 List of Formulas

Note: Use only the needed equations.

F  P(1  i ) n
i
(A/F,i,n) 
(1  i ) n  1
 (1  i ) n  1
(P/A,i,n)   n 
;i  0
 i (1  i ) 
(1  i ) n  in  1
(P/G,i,n) 
i 2 (1  i) n
Pg  A1 ( P / A, g , i, n)
 1 g  n
1   
  1  i  g i
( P / A, g , i, n)   i  g

 n g i
1  i
I = (P) (n) (i)
if  i  f  i * f
r m
Effective i per time period  ( 1  ) 1
m
ia  (1  i ) m  1
1

i  (1  ia )  1
m

Capitalized Cost  CC  P  A/i or CC  AW/i

B/C = (B - D) / C
PI = (PW o f NCF) / ( PW of init ial investment)
Profit = R – TC
TC = FC + VC
R = (r) (Q)
VC = (v) (Q)
QBE = (FC) / (r – v)
Dt = (B – S) / n
BVt = B – (t) (Dt)
d = dt = 1/n
DB Method: d = f * (1/n), f = 1.5, 2 etc.

Page 2/10
dmax = 2/n
Dt = (d) (BVt-1) = (d) (B) (1 – d)t-1
BVt = (B) (1 – d)t = (BVt-1) – (Dt)
Dt = (dt) (B)
BVt = (BVt-1) – (Dt)
BVt = (B) - ∑ Dj
NOI = EBIT = (GI) – (OE)
TI = (GI) – (OE) – (D)
Taxes = (TI) (T)
NOPAT = (TI) (1 – T)
Te = state rate + (1 – state rate) (federal rate)
Taxes = (Te) (TI)
CFBT = (GI) – (OE) – (P) + (S)
CFAT = (CFBT) – (Taxes)
CFAT = GI – OE – P + S - (GI –OE – D) (Te)
Before-tax ROR = (after-tax ROR) / (1 - Te).

Page 3/10
Compound Interest Factor Tables

Page 4/10
Question # 1 (5 points)
What would be the monthly real interest to guarantee a 14.4% of market interest rate (inflation-
adjusted) with 4% of inflation per year?

if = i + f + if

0.144 = i + 0.04 + 0.04i

Solve for i = 0.1 (2 pt)

0.1 = (1+im)12 -1 (2 pt)

⸫ im = 0.079 or 0.79 % (1 pt)

Page 5/10
Question # 2 (6 points)
The cash flows for two water treatment systems are shown. Determine which should be selected
on the basis of an annual worth analysis at an interest rate of 10% per year. You should clearly
mention which is your final decision.

MF UF
First cost, $ -30,000 -50,000
Annual cost, $ per year -8,000 -4,000
Salvage value, $ 5,000 10,000
Life, years 5 10

AWMF = -30,000 (A/P, 10%, 5) – 8,000 + 5,000 (A/F, 10%, 5) (1 pt)

= -7,913 – 8,000 + 819 = -15,094 (1 pt)

AWUF = -50,000 (A/P, 10%, 10) – 4,000 + 10,000 (A/F, 10%, 10) (1 pt)
= -8,137 – 4,000 + 627 = -11,510 (1 pt)

UF system should be selected. (2 pt)

Page 6/10
Question # 3 (6 points)
We are buying a machine for cleaning up the seawater which is contaminated with oil spill.
Compare the following three alternatives by adopting the incremental ROR analysis when
MARR = 10%. Use PW method after you calculate the incremental values. Which one should
we select?

Machine 1 Machine 2 Machine 3

First cost, $ -5,000 -6,500 -8,500
Annual operating cost, $ -3,000 -2,500 -2,000
Life, years 5 5 5

First comparison: 2-to-1,

0 = -1500 + 500 (P/A, Δi*, 5)
3 = (P/A, Δi*, 5) (1 pt) – refer to the table 3 & 4
18% < Δi2-to-1* < 20% (1 pt)
Δi2-to-1* > MARR (10%)
Therefore, select 2. (1 pt)

Second comparison: 3-to-2,

0 = -2000 + 500(P/A, Δi*, 5)
4 = (P/A, Δi*, 5) (1 pt) – refer to the table 1 & 2
7% < Δi* < 8%
Δi3-to-2* < MARR (10%) (1 pt)

Therefore, final selection = Machine 2 (1 pt)

Page 7/10
Question # 4 (6 points)
We are looking for a location to build a water treatment facility. Considering the characteristics
of the facility, benefit-cost analysis should be done for a proper selection. Using an incremental
B/C analysis at 3% of interest rate per year, find the best place. You should clearly mention
which is your final decision.
Location 1 Location 2 Location 3
Land cost, $ million 19.3 28.5 35
Facility first cost, $ million 460 446 446
Benefits, $ million per year:
Pumping cost savings 5 3 5
Sales to area communities 12 10 8
Added revenue from the company 6 6 6
Total benefits per year 23 19 14

Location 1: AW of costs = (19.3 + 460)(0.03) = $14.379 (per year)

AW of benefits = $23
Location 2: AW of costs = $ 14.235
AW of benefits = $19
Location 3: AW of costs = $ 14.430
AW of benefits = $14
(1.5 pt)

B/C1 = 23/14.379 > 1

B/C2 = 19/14.235 > 1
B/C3 = 14/14.430 < 1, therefore we drop location 3. (0.5 pt)

Compare 1 to 2: (2 pt)
ΔB = 23 – 19 = 4
ΔC = 14.379 – 14.235 = 0.144

ΔB/ΔC1-to-2 = 27.7 (1 pt)

Therefore, we should select Location 1. (1 pt)

Page 8/10
Question # 5 (6 points)
We are making a ‘make-buy’ decision. A high-use component can be purchased for $50 per
unit. Alternatively, we can make the component in-house at a cost of $10 per unit, if the
equipment is purchased ($200,000). Labor and other operating costs are estimated to be $40,000
per year over the study period of 5 years. Salvage is estimated at 20% of first cost and i = 10%
per year. Determine the breakeven quantity.

AWbuy = AWmake (2 pt)

-50Q = -200,000(A/P, 10%, 5) + 40,000 (A/F, 10%, 5) – 40,000 – 10Q (2 pt)

-40Q = -52,759 + 6,551 – 40,000 = -86,207

Q = 2155.175 (2 pt)
(By rounding up, either 2155 or 2156 were considered as correct answer.)

Page 9/10
Question # 6 (6 points)
A telecommunication company has an asset which has a first cost of $24,000, no salvage and a
4-year recovery period. Use a DDB depreciation method and an effective tax rate of 30%.
Determine CFBT, D, TI, taxes, and CFAT values (in $) for Years 1 to 4 in the following table.
Show your calculations.

Year GI Expenses CFBT D TI Taxes CFAT

0 - -24,000 -24,000 - - - -24,000

1 6,000 -1,000

2 10,000 -2,500

3 8,000 -2,500

4 7,000 -2,500

Sol:

Year GI Expenses CFBT D TI Taxes CFAT

0 - -24,000 -24,000 - - - -24,000

1 6,000 -1,000 5,000 12,000 -7000 -2,100 7,100

2 10,000 -2,500 7,500 6,000 1,500 500 7,050

3 8,000 -2,500 5,500 3,000 2,500 750 4,750

4 7,000 -2,500 4,500 1,500 3,000 1,000 3,600

CFBT = GI – Expenses or CFBT = GI + Expenses (when expenses expressed in negative values) (1 pt)

d = 2/n = 2/4 = 0.5 (1 pt)

D1 = d ∙ BV0 = 12,000 (1 pt)

D2 = d ∙ BV1 = 6,000

D3 = d ∙ BV2 = 3,000

D4 = d ∙ BV3 = 1,500

TI = CFBT – D (1 pt)

Taxes = Te TI (1 pt)

CFAT = CFBT – Taxes (1 pt)

Wrong value – a partial deduction for each calculation mistake.

Page 10/10